Patriot Coal Update: Mining For Venue

Late last week, Judge Shelley C. Chapman of the Bankruptcy Court for the Southern District of New York heard arguments from a number of parties regarding whether the New York bankruptcy court is the proper venue for Patriot Coal Corporation’s bankruptcy cases. In re Patriot Coal Corp., Case No. 1:12-bk-12900. Judge Chapman did not rule on the venue question from the bench. Instead, the parties will wait for a ruling while proceeding with the bankruptcy case.

Section 1408 of the United States Code permits a debtor to commence a bankruptcy case in any judicial district in which it has a “domicile, residence, principal place of business . . . or principal assets,” or in which the bankruptcy case of an affiliate is pending. 28 U.S.C. § 1408(1) and (2).

Patriot Coal Corporation filed for chapter 11 in the Bankruptcy Court for the Southern District of New York on July 9, 2012. The Debtors’ headquarters are located in St. Louis, Missouri, and the majority of their mining activities take place in West Virginia. However, the Debtors secured venue in the New York bankruptcy court by creating two New York-domiciled non-operating subsidiaries in early June 2012, just weeks before their bankruptcy filings.

Although the Debtors’ actions were likely proper under the plain language of the section 1408, a debtor’s venue choice is not absolute. Section 1412 of the United States Code provides that a court may transfer a bankruptcy case to another district if the transfer is “in the interest of justice or the convenience of the parties.” 28 U.S.C. § 1412. Both the United Mine Workers of America and the United States Trustee filed motions to transfer venue pursuant to section 1412, in which a number of interested parties joined.

During the first day of the hearing, the UMWA argued that Judge Chapman should transfer the cases to the Bankruptcy Court for the Southern District of West Virginia in the interests of justice. The UMWA argued that the West Virginia court has extensive experience with the mining industry, and the environmental issues that are unique to the mining industry. The UMWA argued that the New York court would have a “learning curve” with respect to these issues. In addition, the UMWA argued that the cases should be transferred to West Virginia for the convenience of the parties because the employees, certain major creditors and other key constituents were located in West Virginia. Not surprisingly, Judge Chapman did not receive well the UMWA’s “learning curve” argument. She questioned whether a mining case would have a different learning curve than a case involving a large scale chemical company, power company, or airline.

The Office of the U.S. Trustee argued that the cases should be transferred in the interest of justice to a district with a more substantial connection to the case. The Office of the U.S. Trustee focused solely on the propriety of the Debtors’ creation of venue just weeks before filing their case, arguing that such abuse of the venue statute should not stand.

In questioning both the UMWA and the Office of the U.S. Trustee, Judge Chapman focused on the reasoning behind the Debtors’ filing in New York. Judge Chapman noted that a debtor in bankruptcy is a “honest broker” that has a fiduciary duty to act in the best interest of its stakeholders, and to maximize the value of the bankruptcy estate for the benefit of all of the stakeholders. Thus, a debtor’s management should analyze applicable venue options and make a determination that it is in the best interest of the stakeholders to choose one venue over another.

The Debtors presented their arguments during the second day of the hearing. While the Debtors’ pleadings focused on the convenience of filing in the Southern District, the Debtors may have adjusted their oral argument based on the Judge’s sstatements the prior day. As a result, the Debtors focused their oral appeal on their exercise of business judgment in filing in the Southern District of New York. They were joined by the Creditors Committee and senior lenders.

Judge Chapman refrained from ruling from the bench at the close of the hearings, and did not announce when she will rule. However, by delaying a ruling, Judge Chapman could allow the cases to proceed toward substantive resolution. Ultimately, without evidence from the movants that the Debtors made their venue choice in bad faith or for untoward reasons, it appears that the Debtors’ business judgment to file in the Southern District of New York may hold – at least long enough to advance the cases.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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